PART ONE : 15 PTS. Based in Italy, Datura, Ltd., in an international importer-ex
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Question
PART ONE: 15 PTS.
Based in Italy, Datura, Ltd., in an international importer-exporter of pottery with distribution centers in the United States, Europe, and Australia. The company was very successful in its early years, but its profitability has since declined. As a member of a management team selected to gather information for Datura’s next strategic planning meeting, you have been asked to review its most recent contribution margin income statement for the year ended December 31, 2015, which follows:
Datura, Ltd.
Contribution Margin Income Statement
For the year Ended December 31, 2015
Sales Revenue* $13,500,000
Less variable costs:
Purchases 6,000,000
Distribution 2,115,000
Sales commissions 1,410,000
Total variable costs 9,525,000
Contribution margin $ 3,975,000
Less fixed costs:
Distribution 985,000
Selling 1,184,000
General and Admin. 871,875
Total fixed costs 3,040,875
Operating Income 934,125
*In 2015, Datura sold 15,000 sets of pottery.
REQUIRED:
For each set of pottery sold in 2015, calculate the:
Selling Price per unit
Variable Purchases cost per unit
Variable Distribution cost per unit
Variable Sales Commission per unit
Contribution Margin per unit
Calculate the break-even point in units and in sales dollars.
Historically, Datura’s variable costs have been about 60 percent of sales. What was the ratio of variable costs to sales in 2015 (round to two decimal places)?
PART TWO: 10 PTS.
Refer to the information in Part One. In January 2016, the president of Datura, Ltd., conducted a strategic planning meeting. During the meeting, the vice president of distribution noted that because of a new contract with an international shipping line, the company’s fixed distribution costs for 2016 would be reduced 10 percent and its variable distribution cost per unit by 4 percent. The vice president of sales offered the following information:
We plan to sell 15,000 sets of pottery again in 2016, but based on review of the competition, we are going to lower the selling price to $890 per set. To encourage increased sales, we will raise sales commissions to 12 percent of the selling price.
The president is concerned that the changes described by the vice presidents may not improve operating income sufficiently in 2016. If operating income does not increase by at least 10 percent, she will want to find other ways to reduce the company’s costs. She asks you to evaluate the situation by preparing a report.
REQUIRED:
Prepare a budgeted contribution margin income statement for 2016. Your report should show the budgeted (estimated) operating income based on the information presented in Part One and Part two. Will the changes improve operating income sufficiently? Explain?
PART THREE:
As noted in Parts One and Two, Datura Ltd., sold 15,000 sets of pottery in 2015. For the next year, 2016, Datura’s strategic planning team targeted sales of 15,000 sets of pottery, reduced the selling price to $890 per set, increased sales commissions to 12 percent of the selling price, and decreased fixed distribution costs by 10 percent and variable distribution cost per unit by 4 percent. It was assumed that all other costs would stay the same.
Based on the analysis of these changes, Datura’s president is concerned that the proposed strategic plan will not meet her goal of increasing Datura’s operating income by 10 percent over last year’s income and that the operating income will be less than last year’s income. She has come to you for a spreadsheet analysis of the proposed strategic plan and for the analysis of a special order she just received from an Australian distributor for 4,500 sets of pottery. The order’s selling price, variable purchases cost per unit and sales commission will be the same as the rest of the business, but the variable distribution costs will be $160 per unit. Total fixed costs will be unaffected by the special order.
REQUIRED:
Calculate the total contribution margin from the Australian Sales.
Prepare a revised budgeted contribution margin income statement for 2016 that includes the Australian order. Does Datura need the Australian sales to achieve its targeted operating income for 2016?
Explanation / Answer
Part 1:
Break-even point in units = Total fixed costs / Contribution margin per unit = $ 3,040,875 / $ 265 = 11,475 units
Break-even point in sales dollars = 11,475 x $ 900 = $ 10,327,500
The ratio of variable costs to sales in 2015 = $ 635 / $ 900 x 100 = 70.55%
Part 2:
Budgeted Contribution Margin Income Statement for 2016:
Part 3:
Total contribution margin from the Australian Sales
Total operating income = $ ( 775,225 + 1,004,400) = $ 1,779,625
Yes, Datura needs the Australian sales to achieve its targeted operating income for 2016.
Selling price per unit $13,500,000 / 15,000 $ 900 Variable purchase cost per unit $ 6,000,000 / 15,000 $ 400 Variable distribution cost per unit $ 2,115,000 / 15,000 $ 141 Variable sales commision per unit $ 1,410,000 / 15,000 $ 94 Contribution margin per unit $ 900 - $ 635 $ 265Related Questions
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